In a previous entry we discussed the value investing strategy and applied it to Palm Inc. options. In this article we will discuss another company from the Steel industry that investors may also consider under valued.
IPSCO Inc. (IPS) is a North American steel and pipe manufacturer and based in Canada. The company also operates scrap metal processing facilities and has the ability to produce 3.5 million tons of steel and 1.7 tons of pipe each year. The company’s business exclusively sells to American customers (72%) and Canadian customers (28%).
Some of the interesting features of IPSCO’s stats include a 6.6 P/E and a 14.06 EPS. A 24 October news report declared that the company’s 3rd quarter profits were up 47%. (moneycentral). The article also mentions that the company is looking to acquire NS Group Inc., a KY.-based maker of oilfield tubular products sometime before January 2007.
Continuing with fundamental stats, the company’s debt/equity ratio is 0.13 where the industry average is 0.54. A high EPS and low debt/equity land it squarely in the value category.
The bad news is that IPSCO’s stock price has fluctuated between $82 to $97 in the past three months. The current Price of IPSCO is around $92, requiring a significant amount of capital to enter even on contract. So, keeping this in mind, I will analyze a covered call first and then take a look at an alternative strategy, bull put credit spreads, allowing for potential investment with less capital.
First let’s take a look at the November covered call. If you would like to brush up on the covered call investment strategy, please see our covered call example page.
| StrategySearch – Covered Calls – IPSCO INC (IPS) $88.30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Expire &Strike |
Bid | Downside Protection |
%If Unch. |
%Return Assigned |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IPSLR | 06 DEC 90.00 | $3.90 | 4.40% | 4.60% | 6.60% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
An investor would pay $8,830 out of pocket to purchase 100 shares, earning a potential profit of $390 for selling 1 contract.
A somewhat riskier position per percent movement of the stock, but enables stock options position entry with less required capital is the bull put credit spread. A Bull Put Credit spread will require less capital to enter the trade, but it does offer a higher percentage risk if the stock goes against the investor.
| StrategySearch – Bull-Put Credit Spreads – IPSCO INC (IPS) $88.30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Month &Strike |
Bid Price |
Buy Option |
Month &Strike |
Ask Price |
%Return | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IPSXO | 06 DEC 75.00 | $0.65 | IPSXN | 06 DEC 70.00 | $0.35 | 6.40% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The potential on this trade is $30.00/contract with a maximum downside of $470.00/contract. As long as IPS is equal to or higher than the short strike on option expirations day of $75, this position will return the full profit potential of 6.4%.
Join PowerOptions today, and you too can start reaping the benefits of the covered call and the bull call debit spread investment strategy.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a covered call investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing covered call options positions.
[tags]stock price, covered call example, covered call investment strategy, covered call options, investment strategy, option income, poweroptions, stock options, IPSCO Inc., IPS, NS Group Inc., bull put credit spreads[/tags]